Governor-elect Gavin Newsom says he hopes to amend the California tax code to lessen its dependence on income and capital gains taxes paid by the very rich. Yet the last two serious attempts at tax reform were both dead on arrival, and the political dynamics since their failure appear unchanged or even more unfavorable.

With the state overdue by historical standards for another recession, Newsom is well aware of the revenue nightmare that is looming. After the Great Recession hit a decade ago, state revenue plunged nearly 20 percent – leading to harsh budget cuts in education, public health and social services. Since income and capital gains taxes generate about two-thirds of state revenue, volatility is common.

The revenue decline a decade ago led then-Gov. Arnold Schwarzenegger to create a commission that in 2009 recommended slashing taxes on income and capital gains while imposing taxes on broad categories of services including legal work, haircuts and tickets to sports and entertainment events. The goal was a tax code rewrite that was initially revenue-neutral but that could end up creating considerable new revenue because of provisions designed to promote economic growth.

Democrats see income-tax cut as gift to rich

Yet while commission heavyweights like former Treasury Secretary George Shultz and many economists touted the wisdom of the proposal, the commission’s tax-overhaul blueprint was blasted by both parties from the moment it was released.

Democrats said the plan was a giveaway to the rich. Republicans knocked it for expanding government taxation to new areas.

The scheme – dubbed the Parsky plan because Rancho Santa Fe GOP businessman Gerald Parsky chaired the commission – never even came up for a committee hearing.

Six years later, in 2015, state Sen. Robert Hertzberg pushed a similar proposal, but with a twist. Instead of being revenue-neutral, has plan would yield $10 billion in new revenue a year. Yet Hertzberg’s plan was also DOA in the Capitol for the same reasons as Parsky’s.

Now, with the progressive wing in more complete control than ever of Democrats, their antipathy toward the idea of tax relief for the rich may never have been stronger. That was reflected in the recent Sacramento Bee story about Newsom’s interest in revamping the state tax code.

Jessica Bartholow, policy advocate at the Western Center on Law & Poverty, told the Bee that the tax code shouldn’t be changed to help the rich and big business.

“Capital gains is money earned by people who didn’t earn it,” Bartholow said. “If wealthy corporations and people are having an upswing in their interests, then why shouldn’t the poorest people?”

Republicans fear reform would prove bait-and-switch

The strongest voice in support of tax reform the Bee cited was Rob Lapsley, president of the California Business Roundtable. But the basic sentiment conservatives expressed about the Parsky and Hertzberg plans – Sacramento wants to tax even more human activities? – is at least as intense as in 2009 and 2015. There is considerable suspicion that any reform plan would end up as a Trojan horse for much higher taxes.

This is fueled by evidence that Democrats are gearing up for a huge push to hike taxes even though state revenue is at an all-time high. The most high-profile gambit is qualifying a measure for the 2020 ballot that would end Proposition 13 protections against property tax hikes of more than 2 percent a year for commercial and industrial properties.

This tax-hike fervor is already evident in local governments, including some under Republican control. As CalWatchdog reported last month, more than 150 local governments asked voters to raise taxes in the June and November elections. While most of the tax hikes were adopted after campaigns depicting them as crucial to public safety and to maintaining government services, by far the fastest-growing category of local spending is on pension costs, which are predicted to roughly double for California cities from 2015 to 2025.

7 comments

Even George Skelton, hardly a man of the right, has admitted that the state income tax is too dependent on the few and the rich. Evidently Newsom understands it. Unfortunately, even in California, there’s not enough of the few and the rich to sustain a society. And I say this as one who doesn’t want any more tax cuts at the federal level, and who opposes “starve the beast. “

The dems in charge would never agree to a flatter tax code even though it is a good idea, and fair. If you thought things were bad in CA the last time the economy weakened, you aint seen anything yet. Under Brown, the state doubled down on this dangerous tax system, making it even more dependent on the wealthy. But good luck changing it, probably the best single thing they could do for the state’s long term fiscal health and it has zero chance of success.

I think the legislature is finding it can get away with regressive taxes on energy either directly through the fuel taxes to improve road maintenance (which just survived a challenge) or through cap and trade or “low carbon renewable fuel” fees, which are currently maxed out and likely a larger part of the $1 premium per gallon drivers pay at the pump. I suspect the 20 million drivers in California consume ~600 gallons of gas per year so that’s a $12 billion dollar annual hit on resident’s pocket books and even if only half ends up in the state’s coffers, its a lot of money from people that don’t rely on investment income to get by.

I don’t disagree, the state understands the income tax is maxed out so they are coming up with all sorts of other user fees and taxes that are meant to be targeted but in reality just go into the general fund to be spent/wasted.

This really isn’t rocket science. The relationship with California tax payers is eroded. Once a state alienates their main tax base, they are then required to find new sources of revenue. Here is a thought: control spending, invest in growth, keep our corporate enterprises thriving in our state, invest in education, reduce regulation and develop a tax structure the middle class can support (your tax base). As of now – every person I speak with is thinking of a way to leave California. Sad that most families are searching for a way out rather than a way to stay, raise families and settle. Unfortunately the state will hit rock bottom before we wise up to rebuild. Sure I’ll get some nasty comments back, but this is the simple truth.

You are correct. There is a general feeling of discontent in the state.
If we do hit bottom, I don’ t know if we could have worse leadership in Newsom. All he does is mouth talking points, be bold bs.i expect him to take a leave for detox, or homosexual sex addiction at some point. What a twit.

Why not put away income from high incomes and capital gains during good times for bad times? With some kind of mechanism that would keep from spending it in good times. Progressive taxation is worth keeping, it’s just necessary to smooth out the highs and lows.

Chris Reed

Chris Reed is a regular contributor to Cal Watchdog. Reed is an editorial writer for U-T San Diego. Before joining the U-T in July 2005, he was the opinion-page columns editor and wrote the featured weekly Unspin column for The Orange County Register. Reed was on the national board of the Association of Opinion Page Editors from 2003-2005. From 2000 to 2005, Reed made more than 100 appearances as a featured news analyst on Los Angeles-area National Public Radio affiliate KPCC-FM. From 1990 to 1998, Reed was an editor, metro columnist and film critic at the Inland Valley Daily Bulletin in Ontario. Reed has a political science degree from the University of Hawaii (Hilo campus), where he edited the student newspaper, the Vulcan News, his senior year.
He is on Twitter: @chrisreed99.